2025 (7) TMI 295 - AT - Income Tax

Validity of assessment framed u/s 143(3) OR u/s 153C - HELD THAT - We fail to understand that when the AO himself has drawn of satisfaction note clearly pointing out that the assessment should be completed u/s 153C of the Act then why at the time of passing of assessment order he did not resort to that provision. This is a clear fundamental lapse on the part of the AO which cannot be condoned. By placing reliance on the various legal propositions and the acceptable judicial precedence the assessment order is not sustainable as it has been passed without following the due rigours of law. Appeal of the assessee is allowed.

Summary

The core legal questions considered by the Tribunal in this appeal pertain to the jurisdictional validity and procedural correctness of the assessment order passed under section 143(3) of the Income Tax Act, 1961 (the Act) for the Assessment Year (AY) 2021-22, in light of the provisions of sections 153A, 153C, and 153D of the Act. Specifically, the issues include:

1. Whether the reassessment order framed under section 143(3) without invoking section 153C is legally sustainable when the assessment relates to documents seized during a search under section 132 and handed over to the Assessing Officer (AO) of the third party (assessee) under section 153C.

2. Whether the AO erred in not mentioning section 153C in the assessment order despite recording satisfaction under that section and obtaining approval under section 153D.

3. Whether the assessment proceedings initiated under section 143(2) and finalized under section 143(3) abated or became void due to the operation of the proviso to section 153A(1) read with section 153C(1).

4. Whether the additions made by the AO treating alleged unexplained investments under section 69 and taxing them under section 115BBE were justified, considering the principles of natural justice and the evidentiary material.

5. Whether the interest charged under sections 234A, 234B, and 234C was legally tenable.

Issue-wise Detailed Analysis

1. Jurisdiction and Validity of Assessment under Section 143(3) vs. Section 153C

Legal Framework and Precedents: Sections 153A and 153C of the Act deal with assessments following search and seizure operations. Section 153C mandates that where any document or asset is seized from a person (searched person), and such document or asset relates to another person (third party), the AO of the searched person must hand over the seized material to the AO of the third party. The AO of the third party then initiates proceedings under section 153C for assessment or reassessment for the relevant block period. Section 153D requires prior approval before issuing notice or passing order under section 153C.

The Supreme Court in CIT vs Jasjit Singh (458 ITR 437) clarified that the date of handing over seized documents to the AO of the third party is deemed the date of search for the third party, thus triggering the limitation period under section 153C.

Court's Interpretation and Reasoning: The Tribunal analyzed the facts where the search was conducted on 6-1-2021 on a related party, and the incriminating documents pertaining to the assessee were handed over on 25-11-2022. The AO recorded satisfaction notes under section 153C but framed the assessment for AY 2021-22 under section 143(3) without issuing notice under section 153C or obtaining approval under section 153D.

Relying on coordinate bench decisions involving the same search, the Tribunal held that the assessment should have been framed under section 153C, as the date of search for the assessee is the date of receipt of seized documents (25-11-2022). Hence, the assessment framed under section 143(3) was held to be void ab initio.

Key Evidence and Findings: The satisfaction notes recorded by the AO, the absence of notice under section 153C, and the absence of approval under section 153D were critical. The Right to Information Act order confirmed no notice or approval under these sections was issued or obtained for AY 2021-22.

Application of Law to Facts: Since the documents were handed over in the previous year relevant to AY 2023-24, the limitation period for AY 2021-22 falls under section 153C. The AO's failure to follow the procedure under section 153C and framing assessment under section 143(3) was a fundamental procedural lapse.

Treatment of Competing Arguments: The Revenue could not justify the absence of notice or approval under section 153C/153D. The Tribunal rejected the argument that assessment under section 143(3) was valid, emphasizing the binding precedent and statutory scheme.

Conclusion: The assessment order under section 143(3) for AY 2021-22 was quashed as it was not sustainable without following the procedure under section 153C.

2. Legality of Additions under Section 69 and Taxation under Section 115BBE

Legal Framework and Precedents: Section 69 deals with unexplained investments, and section 115BBE prescribes a special rate of tax on undisclosed income detected during search or survey. Principles of natural justice require that the assessee be given opportunity to cross-examine adverse material and respond to findings.

Court's Interpretation and Reasoning: The assessee contended that the additions were made without considering submissions, without providing the entire adverse material, and without opportunity for cross-examination. However, since the entire assessment was quashed on jurisdictional grounds, the Tribunal refrained from adjudicating these merit-based grounds.

Key Evidence and Findings: The AO's addition of Rs. 4,89,00,000/- as unexplained investment was based on seized WhatsApp chats and discrepancies in declared sale consideration. The Tribunal noted the procedural lapse in framing assessment under wrong section but did not examine the merits of the addition.

Application of Law to Facts: As the assessment was void ab initio, the question of correctness of addition did not arise at this stage.

Treatment of Competing Arguments: The Revenue did not challenge the jurisdictional issue effectively and did not press the merit grounds once jurisdiction was found lacking.

Conclusion: Grounds relating to addition under section 69 and taxation under section 115BBE were left open due to quashing of assessment on jurisdictional grounds.

3. Interest Charged under Sections 234A, 234B, and 234C

Legal Framework and Precedents: Interest under these sections is charged for delay in filing return, non-payment or short payment of advance tax, and deferment of advance tax installments respectively.

Court's Interpretation and Reasoning: The assessee challenged the levy of interest, but the Tribunal did not address this issue substantively as the assessment was quashed on jurisdictional grounds.

Conclusion: The issue was not adjudicated and was left open.

Significant Holdings

"The date of handing over of the seized document by the AO of the searched person to the AO of the third party (assessee) shall become the date of search qua the third person."

"The assessment for AY 2021-22 should have been carried out by issuing notice under section 153C of the Act and not under section 143(2) of the Act. Therefore, the assessment order passed under section 143(3) is bad in law and liable to be quashed."

"The regular assessment passed by issuance of notice under section 143(2) without aid of section 153C despite satisfaction note from AO of searched person is not supportable in law and is void ab initio."

"The fundamental lapse on the part of the AO in not following the due rigours of law in framing assessment under incorrect provisions cannot be condoned."

"Since the entire assessment is quashed on jurisdictional grounds, other grounds raised on merits are left open."

The Tribunal's final determination was to allow the appeal, quash the assessment order dated 08.02.2024 passed under section 143(3) for AY 2021-22, and direct that the assessment be framed under section 153C in accordance with law. The appeal was allowed on jurisdictional grounds without deciding the merits of additions or interest charges.